“The history of this country, and the history of the world, I’m afraid, is full of examples of good men who do bad things.”
–Judge Jed Rakoff (2012)
Raj Rajaratnam is America’s most notorious inside trader. In 2011, the billionaire owner of the Galleon hedge fund was sentenced to 11 years in jail—at that time the longest insider trading sentence in history—for a brash and hugely profitable insider trading scheme. Rajaratnam was brilliant and bold, but there is no doubt that most of his financial success came from the fact that his full attention most days was on getting inside information so that he could cheat the system. His own right-hand man testified in court that Rajaratnam’s mandate for his Galleon employees was “to do your homework but to still cheat on the test.” Cheating via insider trading was Galleon’s business model.
Rajaratnam seemed to spend most of his waking hours collecting contacts in the financial industry and in various companies who could give him an “edge,” i.e., material, nonpublic information. He endlessly demanded of his employees that they do the same. When you know the answers to a test before it’s given, it is much easier to do well.
We are late to the game in reading Anita Raghavan’s 2013 book about the scandal: The Billionaire’s Apprentice: The Rise of the Indian American Elite and the Fall of the Galleon Hedge Fund. The book is about Rajaratnam’s insider trading, the Indian-American diaspora and its tremendous business success in America, and one particular tipper who helped Rajaratnam make his billions—Rajat Gupta, who is the focus of this blog post…the good man who did a bad thing.
Gupta was just one of hundreds of people who funneled illicit inside information to Rajaratnam. But why did he do it?
Gupta’s personal story is largely impressive and admirable. His father was a prominent and successful man who died when Gupta was just a teenager. His mother’s death soon followed and Gupta assumed an active role in caring for his younger siblings. He managed this as he was educated at the elite Indian Institute of Technology and Harvard Business School, excelling at each. Then he joined the prestigious McKinsey & Company consulting firm where again he flourished, eventually serving three terms as managing director. He was the first Indian to hold the position. His success burnished his reputation and gave him access to important personages world-wide, including the Clintons, Kofi Annan, Hank Paulson, and Raj Rajaratnam. Gupta was an idol among businesspeople in South Asia. He was active in numerous charities, including the Bill & Melinda Gates Foundation, the Global Fund to Fight AIDS, Tuberculosis, and Malaria, and the America-Indian Foundation. He sat on boards of directors at Goldman Sachs, Procter & Gamble, American Airlines, and other large corporations. All the while, he was a mentor to many, a friend to hundreds, and a devoted family man to his extended family. No wonder that when Gupta asked friends and relatives for letters of support when he was to be sentenced for insider trading, more than 400 were submitted, most praising him lavishly.
But why were such letters needed? Why did Gupta, this good man, blatantly violate the insider trading laws? Judge Rakoff, who presided over the trial and sentenced Gupta was mystified. He mused at Gupta’s sentencing:
The Court can say without exaggeration that it has never encountered a defendant whose prior history suggests such an extraordinary devotion, not only to humanity writ large, but also to individual human beings in their time of need.
But when one looks at the nature and the circumstances of the offense, the picture darkens considerably. (p. 410)
Why did this good man with a lifetime of achievement and good deeds engage in insider trading by tipping Rajaratnam? Because Gupta continues to maintain his innocence, virtually conclusive evidence to the contrary, we do not have his explanation for why he did what he did. Author Raghavan herself also believes we will never know for certain what was going on in Gupta’s mind as he tipped Rajaratnam multiple times in violation of the law, but she did speculate.
First, she asked: “Was it a sense that passing along a bit of inside information was no more reprehensible an act than driving seventy miles per hours in a sixty-five-mile-per-hour speed zone?” (p. 401) This is certainly possible. Such a sense could be characterized as a classic form of rationalization: denial of victim, where people say to themselves: “I know this is wrong, but no one is really being hurt. Therefore, I can do this wrong thing and still be a good person.”
Second, Raghavan asked: “Was it that for the first time in his life Gupta was flying without a manual? (There was no HBS handbook or McKinsey code of conduct to comply with anymore.)” (p. 401) Studies do show that employees are more likely to do the right thing if their company has a solid code of ethics that it enforces diligently. Codes keep ethics in employees’ frame of reference when they make decisions. As our video on framing explains, what is in a person’s frame of reference when they decide heavily influences the decision they make. Perhaps Gupta was morally adrift without that manual.
Third, Raghavan asks: “Or was it that everyone else around him seemed to be doing it?” This theory highlights the conformity bias. People take their cues as to how to dress, what to eat, and how to choose what is ethical from those around them. You, dear reader, are probably more likely to speed when driving on the highway if those around you are doing so. Many people in Rajaratnam’s orbit and on Wall Street in general were actively engaged in insider trading, so it may not have felt wrong to Gupta, even though intellectually he had to know that it was.
Judge Rakoff also speculated as to Gupta’s motivations. At sentencing, he wondered, if “Gupta, for all his charitable works, ‘may have felt frustrated in not finding new business worlds to conquer [after leaving McKinsey]. [T]here is no doubt that Gupta, though not immediately profiting from tipping Rajaratnam, viewed it as an avenue to future benefits, opportunities and even excitement.’” (p. 409)
This speculation implicates the self-serving bias, which can lead people to believe that they are entitled to what they want, not just what an objective third party would believe that they have earned or deserve. Furthermore, when money enters into one’s frame of reference, it can crowd ethical matters to the side. As noted earlier, framing is an important concept and when money is too important to someone, it can corrupt. And Gupta himself admitted to students at Columbia University before he was caught tipping Rajaratnam:
When I look at myself, yeah, I am driven by money. I like many creature comforts. I want to make sure I take care of my kids well and so forth. And when I live in this society you do get fairly materialistic, so I look at that. I am disappointed. (p. 203)
Incrementalism, the slippery slope, could have been an aggravating factor here. The more successful Gupta was, the more he hung around with millionaires and billionaires and the bigger a role money was likely to play in his decisions. He told those same Columbia students:
I am probably more materialistic today than I was before and I think money is very seductive…you have to watch out for it because the more you have it, you get used to comforts and you get used to, you know, big houses and vacation homes, and going and doing whatever you want and so it is very seductive. However much you say that you will not fall into the trap of it you do fall into the trap of it. (p. 203)
His desire for money and his resentment that he had only a few tens of millions of dollars compared to the much larger treasures that his friends and associates possessed appear to have helped lead Gupta to engage in business relationships with Rajaratnam, which he had to know was risky territory.
Many of Rajaratnam’s tippers, like Gupta himself, were South Asian. Many, like Gupta, were born in India. Again, this is speculation, but the in-group/out-group bias could have played a role here. Because of it, these in-group members would naturally have wished for and reveled in the business success of their fellow in-group members as the Indian elite enjoyed such business success in America. Gupta might well have invoked the rationalization called altruistic cheating where people find it easier to cheat to benefit themselves when it also benefits another, especially another member of their in-group. Gupta was not only in business with Rajaratnam, but he also clearly rooted for Rajaratnam’s success to continue because it reflected well on Gupta, a fellow South Asian.
Whatever his mix of motivations—and we will never know with certainty–Gupta made a tragic mistake that caused him to be sentenced to two years in jail…a terrible outcome for a good man.
Sources
Vikas Anand et al., “Business as Usual: The Acceptance and Perpetuation of Corruption in Organizations,” Academy of Management Perspectives 18(2) (2007).
Suzanna Andrews, “How Rajat Gupta Came Undone,” Bloomberg (May 19, 2011), at https://www.bloomberg.com/news/articles/2011-05-19/how-rajat-gupta-came-undone.
Rajat Gupta, Mind Without Fear (2019).
Madhavankutty Pillai, “Rajat Gupta: Grace and Disgrace,” Open, March 27,2019, at https://openthemagazine.com/features/profile/rajat-gupta-grace-and-disgrace/.
Anita Raghavan, The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (2013).
Thomas Stober et al., “Effective, But Not All the Time: Experimental Evidence on the Effectiveness of Codes of Ethics,” Business and Society Review, Vol 126, #2 pp. 107-134 (2021).
Videos:
Altruistic Cheating: https://ethicsunwrapped.utexas.edu/glossary/altruistic-cheating.
Conformity Bias: https://ethicsunwrapped.utexas.edu/video/conformity-bias.
Framing: https://ethicsunwrapped.utexas.edu/video/framing.
Incrementalism: https://ethicsunwrapped.utexas.edu/video/incrementalism.
Rationalizations: https://ethicsunwrapped.utexas.edu/glossary/rationalizations.
Self-Serving Bias: https://ethicsunwrapped.utexas.edu/video/self-serving-bias.